Four things to consider when starting a consultancy

Are you thinking of becoming a Comms Consultant? When you start any business there are a number of things to consider about your legal structure, the records you need to start keeping and how you’ll pay tax.

Today I’ve invited Zoe Whitman (pictured) who runs But the Books to share her thoughts for All Things IC’s readers.

Zoe and I met at Media Influence Live a few months ago and I thoroughly enjoyed our conversations. Her bookkeeping practice in Bristol helps small businesses with their business finances.

I’ll hand you over…

Four things to consider when starting a consultancy

1) Your business structure

When you’re starting any business one of the first things you should think about is whether you want to trade through a limited company or as a sole trader. There are some significant differences between the two and you should choose the structure which is right for you and your circumstances.

If you trade as a sole trader, you and your business are one and the same. You are subject to income tax on your business profits and as you are legally the same person, you can take money out of the business as drawings provided money is available. You are also liable for your business’s debts if it cannot pay, so this is important to keep in mind.

If you decide to register a limited company, the business will be a separate legal person. It can enter into its own contracts and is liable for its own debts. You as a director will have a number of responsibilities for the business including ensuring the business runs well and that the business makes the relevant returns throughout the year. The business will be subject to corporation tax and you as a director will be restricted in the ways you can take money out of the business.

If you have any questions about which legal structure is right for you and your business, speak to an accountant.

2) How to register for tax

If you work as a self-employed sole trader you’ll pay income tax through your annual self assessment return. If you’re not already registered for self assessment, HMRC need to be notified by 5 October in the second tax year in which you are trading, and your self assessment tax return must be filed and paid by 31 January following the end of the tax year.

If you register a limited company, you’ll be set up with a company tax account in order to file your corporation tax return. You’ll also need to file company accounts to Companies House each year. As an individual and director of a limited company you’ll need to complete a self assessment tax return and through this you’ll pay tax on any dividends you received from the business, although if you take a salary as an employee of the business income tax on this part of your earnings will be deducted from your salary at source through PAYE.

3) How to record income and expenditure and what to record

As the owner of a business you must keep detailed records of your income and expenditure to assist you with preparing your year-end accounts and tax returns. I really have worked with a lot of businesses who haven’t had an accounting system from day one and who have come to me just before an important tax deadline with a bag of receipts.

I’ve been able to get things straight for them, and I know that many people choose to do their books like this, but if you can keep things up to date as you go through the year it will give you great peace of mind as well as giving you really useful insights into how your business is doing throughout the year.

Top tip: I’d suggest setting up a separate bank account from day one.

If you run a limited company then a separate bank account is a legal requirement, if you’re a sole trader it’s not, but it’s still good practice and will help you avoid confusion about which spending was business related and which was personal when you come to doing your accounts.

You’re more than likely invoicing your clients and you should sequentially number your invoices so you can keep track of all income which has been invoiced and you should keep receipts and invoices which support all of your business expenditure.

I’d suggest recording all of your income and expenditure in an accounting system from day one, the big names out there are QuickBooks, FreeAgent, Xero and Sage and most of these offer a free trial. (I use Xero and recommend it – Rachel).

4) Do I need to think about IR35?

If you’re working predominantly for one client, you might well actually be an employee of theirs in all but name. IR35 has been brought in to help distinguish between contractors and employees and allows HMRC to collect additional tax from the employing company to reflect PAYE and NI which would have been deducted if the contractor was an employee on payroll.

There are three main rules to keep in mind when considering whether IR35 might apply to you and these are:

Whether the contractor has to carry out the work personally or whether they can subcontract or send a substitute for themselves,

whether the client has to give the contractor work and whether the contractor must carry out that work when requested to do so, and

whether the client can control when, where and how the contractor carries out the work.

If you think IR35 might apply to your contract or if you’re at all uncertain you should speak to your accountant or call HMRC.